March/April 2008

The Mess of Mandated Markets

Continued from page 2

By David Rotman

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History provides a lesson about the messiness of predicting the market for an energy technology. Almost three decades ago, as the price of oil reached $40 a barrel and many experts worried that it was headed for $80 or even $100, President Jimmy Carter signed the Energy Security Act of 1980. As is the case today, the high price of oil was straining the U.S. economy, and the Middle East was unstable. One key provision of the 1980 legislation created the U.S. Synthetic Fuels Corporation, which was meant to establish a domestic industry that produced liquid fuel from tar sands, shale, and coal. Despite the unknowns surrounding the economics of producing synthetic fuels on a large scale, engineers estimated that they could be produced for $60 a barrel. An initial production target was set at 500,000 barrels a day. But in the early 1980s, the price of oil fell to $20 a barrel. With no prospect of producing synthetic fuels at a price competitive with that of oil, the Synthetic Fuels Corporation was finally shuttered in 1986.

The corporation "didn't fail because of the technology," says John Deutch, who was undersecretary of energy in 1980 and is now an Institute Professor of chemistry at MIT. Rather, he says, it failed because "it focused on production goals, and that turned out to be a bad thing because the market prices went down." Deutch believes that instead of targeting specific production levels, government should participate in the development of alternative fuel technologies by helping to assess their economics and determine whether they meet environmental expectations.

The Synthetic Fuels Corporation and today's Renewable Fuels Standard differ in many ways. But the efforts behind them do reflect a common theme: the federal government's attempt to select a particular technology and create a market for it. The "harsh reality" is that such measures "are unlikely to be effective over the long term," Deutch says. "And nowhere is this more obvious than in ethanol." He and other experts, such as de Gorter and Iowa State's Babcock, would prefer to see technology-neutral policies, such as a carbon or greenhouse-gas tax, that would allow the markets to choose the most cost-effective way of meeting political and environmental goals.

Besides creating the synthetic-fuels program, the 1980 energy bill also included a Biomass Energy and Alcohol Fuels Act, which provided $600 million to the Departments of Energy and Agriculture for research into biofuels made from cellulose or biomass. But that funding was slashed in subsequent years. And while the Energy Department is again aggressively funding research on biofuels, and the 2007 energy bill includes several measures supporting such work, overall federal funding for energy research and development has never fully rebounded from the cuts made during President Reagan's administration. It's one reason that, almost three decades after Jimmy Carter's energy bill, the United States still has no effective answer to high-priced imported oil.

Distorting the markets through federal mandates for biofuels won't help. What might: a well-considered federal policy that financially supports the development of promising new energy technologies and offers technology-neutral incentives for replacing petroleum.

David Rotman is Technology Review's editor.

The Mess of Mandated Markets

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